It was a week ago that we highlighted the latest implied IMF proposal on how to reduce income inequality, quietly highlighted in its paper titled "Fiscal Policy and Income Inequality". The key fragment in the paper said the following:

Some taxes levied on wealth, especially on immovable property, are also an option for economies seeking more progressive taxation. Wealth taxes, of various kinds, target the same underlying base as capital income taxes, namely assets. They could thus be considered as a potential source of progressive taxation, especially where taxes on capital incomes (including on real estate) are low or largely evaded. There are different types of wealth taxes, such as recurrent taxes on property or net wealth, transaction taxes, and inheritance and gift taxes. Over the past decades, revenue from these taxes has not kept up with the surge in wealth as a share of GDP (see earlier section) and, as a result, the effective tax rate has dropped from an average of around 0.9 percent in 1970 to approximately 0.5 percent today. The prospect of raising additional revenue from the various types of wealth taxation was recently discussed in IMF (2013b) and their role in reducing inequality can be summarized as follows.

Property taxes are equitable and efficient, but underutilized in many economies. The average yield of property taxes in 65 economies (for which data are available) in the 2000s was around 1 percent of GDP, but in developing economies it averages only half of that (Bahl and Martínez-Vázquez, 2008). There is considerable scope to exploit this tax more fully, both as a revenue source and as a redistributive instrument, although effective implementation will require a sizable investment in administrative infrastructure, particularly in developing economies (Norregaard, 2013).

We summed this up as follows: "if you are buying a house, enjoy the low mortgage (for now... and don't forget - if and when the time comes to sell, the buyer better be able to afford your selling price and the monthly mortgage payment should the 30 Year mortgage rise from the current 4.2% to 6%, 7% or much higher, which all those who forecast an improving economy hope happens), but what will really determine the affordability of that piece of property you have your eyes set on, are the property taxes. Because they are about to skyrocket."

Sure enough, a week later the Telegraph reports that UK Treasury officials have begun work on a mansion tax that could be levied as soon as next year, citing a Cabinet minister.

"Danny Alexander, the Liberal Democrat Chief Secretary to the Treasury, told The Telegraph that officials had done “a lot of work” on the best way to impose the charge. The preparatory work would mean that a Government elected next year might be able to introduce the charge soon after taking office. Mr Alexander said there was growing political support for a tax on expensive houses, saying owners should pay more to help balance the books.

After all it's only fair. It is also only fair, for now, to only tax the uber-rich, who are so defined merely in the eye of the populist beholder. However, said definition tends to be fluid, and what will be a tax on, i.e., £2 million properties tomorrow, will be lowered to £1 million, £500,000 and so on, in 2, 3, etc, years.

And in a world which as Zero Hedge first defined years ago as shaped by the "fairness doctrine", the one word that was so far missing from this article, can be found momentarily:

“There’s a consensus among the public that a modest additional levy on higher value properties is a fair and reasonable thing to do in the context of further deficit reduction,” he said. “It’s important that the burden is shared.”

There you have it: "fair." Because there is nothing quite like shaping fiscal (and monetary) policy based on what the du jour definition of fair is to 1 person... or a billion. Especially if that billion has a vote in the "democratic" process.

It gets betters:

Mr Alexander said the new tax would not be “punitive” and insisted that the Lib Dems remained in favour of wealth creation.

So if it's not "punitive" it must be... rewarding? And how long until the definition of fair, far short of the projected tax windfall, is expanded to include more and more, until those who were previously for the "fair" tax, suddenly become ensnared by it? As for wealth creation, perhaps in addition to the fairness doctrine it is time to be honest about what socialism really means: "wealth redistribution."

Telegraph continues:

That may be a seen as a challenge to Vince Cable, the Business Secretary, who first called for the mansion tax and has criticised high earners.

The Lib Dems and Labour are both in favour of a tax on expensive houses. Labour says the money raised could fund a new lower 10p rate of income tax.

The Lib Dems have suggested that the tax should fall on houses valued at £2 million and more.

The Treasury last year estimated that about 55,000 homes are in that range, though the Lib Dems say the figure is closer to 70,000.

To be sure not everyone is for the tax:

David Cameron has opposed a mansion tax but George Osborne, the Chancellor, is said to be more open to the idea. Most of the homes that might be affected are in London and the south-east of England.

Boris Johnson, the Tory Mayor of London, promised last week to oppose any move towards the tax, which he described as “brutally unfair on people who happen to be living in family homes”.

Some critics have questioned the practicality of the policy, asking how the State would arrive at valuations for houses.

Well, they will simply draw a redline above any number they deem "unfair", duh. As for the London housing bubble, it may have finally popped, now that all those who bought mansions in London will "suddenly" find themselves at the "fair tax" mercy of yet another wealth redistributionist government.

Unfortunately, for the UK, the "mansion tax" idea, , gloriously populist as it may be, may be too little too late.

As we reported late last week in "The Music Just Ended: "Wealthy" Chinese Are Liquidating Offshore Luxury Homes In Scramble For Cash", the Chinese offshore real estate buying juggernaut has now ended courtesy of what appears to be China's credit bubble bursting. So if the liquidation wave truly picks up, and since there is no greater fool left (you can forget about sanctioned Russian oligarchs investing more cash in the City in a world where asset freezes and confiscations are all too real), very soon London may find that there is nobody in the "fair" real estate taxation category left to tax.

Yesterday, gold climbed $15.27 to $1342.27 at about 7AM EST before it fell back off in New York, but it still ended with a gain of 0.44%. Silver rose to as high as $20.579 at one point, but it then fell back off and ended unchanged on the day.

Euro gold rose to about €966, platinum gained $2.30 to $1432.00, and copper climbed slightly to about $2.95. Palladium prices, meanwhile, closed at a level not seen in more than 2 years with the rally linked to worries about risks to Russian supplies of the metal.

Palladium surged 3.1% to the highest since 2011 on concern supply from Russia may be restricted.
Gold finished higher on Friday, partially recovering from a four-session losing streak on the back of a weaker U.S. dollar, but the metal’s prices still suffered from their worst weekly loss since November - down over 3.5%.Gold in U.S. Dollars, 5 Days - (Bloomberg)

Gold had become overbought after its surge to 6 month highs and was due profit taking and a correction. A perception of an abatement of tensions between Russia and the West has contributed to the pullback this week. Momentum could lead to further falls next week but we expect weakness will be short lived.

Gold’s TechnicalsThere is a risk that gold could fall below immediate support at $1,320/oz and the next levels of support are at $1,300, $1,240 and then back where we started the year at $1,200. A 50% retracement would not be unusual after the speed of recent gains and that would take us to the psychological level of $1,300/oz again. Gold in U.S. Dollars, 1 Year - (Bloomberg)

A political solution needs to be found as governments continue to opt for economic sanctions of various degrees, it could degenerate into a full blown trade and economic war. Were this to occur the benefits of free trade and globalization that we have seen in recent history would be at risk - creating real challenges for the global economy.

The premiums that risk assets such as stock markets command could quickly be lost as market participants reevaluate asset allocations in the light of the more risky economic and geopolitical situation.

Gold in U.S. Dollars, 43 Years - (Bloomberg)Hopefully, calm and wise counsel will prevail and a diplomatic political solution will be found. However, in the meantime, gold continues to be an important asset to own in order to hedge these and other geopolitical and economic risks.

Yellen At Fed - Print Baby PrintIt was very welcome to see a woman taking over the helm of the Federal Reserve. However, we cannot allow our goodwill in this regard to cloud judgement and impact our analysis of her and the Fed’s performance and policies.

Yellen gave mixed messages, both on the economy and on monetary policy, but market participants have chosen to focus on some of the more hawkish comments that she made. She acknowledged that the Fed may have been too optimistic about the economic outlook recently. Yet, she and the Fed largely stuck to their projections for how growth and inflation will unfold in the coming years.

It is important to remember that the Fed did not predict or foresee at all the sub prime crisis, the housing bubble, Bear Stearns, Lehman, the global financial crisis and subsequent recession.

The dollar is set to be structurally weak in the coming years given the still significant imbalances in the U.S. economy and still very poor fiscal state of the economy. No amount of jaw boning or Fed tinkering with interest rates will change that.

While interest rates may rise from nearly 0%, they are set to remain low for the foreseeable future. At least until the bond markets decide to enforce fiscal discipline on the U.S. Then interest rates will likely rise substantially leading to a severe U.S. recession. US Govt 10 Year Yield, 1971 to March 2014 - (Bloomberg)

On a long term basis, it is likely that the dollar will remain weak and gold's bull market will continue until the end of the interest rate tightening cycle which will likely be between 2020 and 2025.

This was seen in the 1970s when interest rates surged higher that decade from a low in March 1971, to a high in September 1981. The U.S. 10 Year went from 5.38% to 15.84% during that period and gold rose from near $35/oz to over $850/oz in January 1980 (see charts).

Thus, contrary to the popular perception, rising interest rates are not bearish for gold. High interest rates and real positive interest rates in a sound economy are very bearish for gold prices and will burst the coming gold bubble. However, that is a long way off - likely between 2018 and 2025 and likely when gold prices are well above their inflation adjusted high (CPI) of $2,500/oz. Indeed, longer term prices over $4,000/oz or $5,000/oz are quite feasible.

EU Agrees Banking Union - Bail-Ins Cometh ...

In the early hours of yesterday morning European Union politicians struck a deal on legislation to create a single agency to handle failing banks and bail-ins in the Eurozone after another all night negotiating marathon ahead of a summit of EU leaders starting in Brussels today.

German Finance Minister Wolfgang Schaeuble was drawn into the talks around 0530 GMT as the negotiations dragged on into the night. The politicians emerged around 0715 GMT with the deal, which now will need formal approval by the European Parliament and by national governments.

Negotiators persuaded nations that had been opposed to the proposed Single Resolution Mechanism and the legislation for bail-ins to agree.

Insolvent banks will be treated equally regardless of the country they are based in. Failed banks creditors, both bond holders and depositors, will be subject to bail-ins in the same way in all countries.

“It’s a very good agreement,” European Central Bank President Mario Draghi said before the meeting of EU leaders in the Belgian capital. The banking union was shaped in part by Draghi and he hailed the compromise plan as “great progress for a better banking union. Two pillars are now in place.”

Plans for a single banking union were put together two years ago due to fears for the euro and the EU’s 6,000 banks. Countries wanted to break the link between sovereigns and insolvent banks to ensure taxpayers were not forced to bail out insolvent banks and to prevent contagion and a systemic crisis.

It had already been agreed that shareholders and importantly now depositors will be bailed in before the single resolution fund can be tapped. About 100 banks plus transnationals and those already bailed out will come under the direct supervision of the ECB from January.

While most of the coverage is on the European Union member states and the European Parliament agreeing the final details of a single resolution mechanism (SRM) to wind up failing banks, there is little coverage of the developing bail-in regimes and the heightened risk that depositors in the Eurozone now face.

Banks in the Eurozone remain extremely vulnerable. Our research on bail-ins and the developing bail-in regimes clearly shows how banks remain very vulnerable and it is now the case that in the event of bank failure, your deposits could be confiscated as happened in Cyprus.

It is important to realise that not just the EU but also the UK, the U.S., Canada, Australia, New Zealand and most G20 nations all have plans for bail-ins in the event that banks and other large financial institutions get into difficulty.

The coming bail-ins will pose real challenges and risks to investors and of course depositors – both household and corporate. Return of capital, rather than return on capital will assume greater importance.

Evaluating counterparty risk and only using the safest banks, investment providers and financial institutions will become essential in order to protect and grow wealth.

It is important that one owns physical coins and bars, legally in your name, outside the banking system. Paper or electronic forms of gold investment should be avoided as they along with cash deposits could be subject to bail-ins.

But veteran investor Jim Sinclair argues that Russia has a much scarier financial attack which Russia can use against the U.S.

Specifically, Sinclair says that if Russia accepts payment for oil and gas in any currency other than the dollar – whether it’s gold, the Euro, the Ruble, the Rupee, or anything else – then the U.S. petrodollar system will collapse:

The theory is that – after Nixon took the U.S. off the gold standard, which had made the dollar the world’s reserve currency – America salvaged that role by adopting the petrodollar. Specifically, the U.S. and Saudi Arabia agreed that all oil and gas would be priced in dollars, so the rest of the world had to use dollars for most transactions.

But Reuters notes that Russia may be mere months away from signing a bilateral trade deal with China, where China would buy huge quantities of Russian oil and gas.

JP Morgan noted last year that “reserve currencies” have a limited shelf-life:

As the table shows, U.S. reserve status has already lasted as long as Portugal and the Netherland’s reigns. It won’t happen tomorrow, or next week … but the end of the dollar’s rein is coming nonetheless, and China and many other countries are calling for a new reserve currency.

In any event, a switch to pricing petroleum in anything other than dollars exclusively – whether a single alternative currency, gold, or even a mix of currencies or commodities – would spell the end of the dollar as the world’s reserve currency.

For that reason, Sinclair – no fan of either Russia or Putin – urges American leaders to back away from an economic confrontation with Russia, arguing that the U.S. would be the loser.

http://www.ingoldwetrust.ch/chinese-gold-demand-488-mt-ytd-up-29

Chinese Gold Demand 488 MT YTD, Up 29 %

Although last week only 34 metric tonnes of gold were withdrawn from the vaults of the Shanghai Gold Exchange (SGE), down 6.52 % from the prior week, year to date there has been a staggering 488 metric tonnes withdrawn, up 29 % to compared to last year. Year to date demand will probably come on par with last year when we enter april, as withdrawals exploded in April 2013. What will happen after April is hard to say, this year’s average daily withdrawals stand at 6.7 metric tonnes, last years daily average was 6 metric tonnes (2197 mt / 365). It will all depend on how much floating supply there is left…

At the current pace, 6.7 metric tonnes a day, China will be roughly importing 1700 metric tonnes this year to meet SGE demand. My research has exposed that SGE withdrawals equal Chinese wholesale demand. Not often, but sometimes we can read other analysts or media share the same findings. From the Chinese media (dated January 10, 2014):

China’s explosion in demand for physical gold in 2013 left a deep impression on international investors. The Shanghai Gold Exchange withdrawals for the year up till 27 December 2013 exceeded 2180 tons. Considering the exchange’s position as a hub for domestic gold circulation, in conjunction with a system that forbids withdrawn gold from re-entering inventory, to a large extent the withdrawals number can be treated as the best benchmark for physical gold demand in the Chinese market. Not to mention that the entire 2013 global mined gold production does not exceed 2700 tons. China’s massive demand has to a large extent remade the world’s gold circulation system. Newly mined and stocked gold is moving through trade links in London – Switzerland – Hong Kong – into China in a large scale orientation towards the East. The impact of China’s demand on international gold price will inevitably increase.

A very important condition for the internationalization of the renminbi is to increase Chinese gold reserves, because it increases the world’s confidence in the renminbi and expands it’s flow capacity.

It still beats me why not many other analysts, journalist and blogs have gotten involved in researching the Shanghai Gold Exchange an the Chinese gold market in general, as this unprecedented exodus of physical gold from West to East is talking place right in front of our eyes month after month.

Kindly note, if someone could prove me wrong on my analysis about Chinese gold demand I would be happy the hear it. Comment below or sent me an email at info@ingoldwetrust.ch.

Meanwhile In The West

In a new note, Goldman Sachs argues that the rise in the price of gold [year to date] has been driven by three unsustainable factors: Weather-induced economic slowdown in the US, a spike in Chinese demand due to credit concerns, and increased geopolitical tension.

So they forecast that future weather conditions in the US will improve their economy and credit concerns and geopolitical tension will soon be dampened?

Goldman also released a report titled: The End Of Chinese Financial Commodity Deals. In which they explain a process called round trippin; circular gold trade between Hong and the mainland to strike an arbitrage profit.

Slide Goldman Sachs

Goldman declines to mention this process of gold export to mainland Custom Specially Supervised Areas and back to Hong Kong are also done from another incentive than for arbitraging. Hong Kong has a booming jewelry industry, in the dense streets of The Special Administrative Region you can find a jewelry store (mostly Chow Thai Fook) on every street corner. It’s estimated that half of all jewelry in Hong Kong is sold to mainland tourist, that can import as much as they like into the mainland. Mainland tourist prefer to buy jewelry in Hong Kong where there’s zero tax on jewelry, whereas in the mainland there’s a 22 % tax on jewelry.

Plausible scenario: a Hong Kong jeweler imports bullion and exports it to the CSS area Shenzhen just across the border, that has a huge jewelry fabrication industry (cheap fabrication). In Shenzhen the jewelry is fabricated and exported back to Hong Kong to be sold in the shops. Note, for trading gold from Hong Kong in and out of a CSS area there is no PBOC permit required. To export gold out of a CSS area into the mainland a PBOC permit is required. I’ve been told this policy is airtight.

Additionally, the inflating of import and export numbers from Hong Kong to the mainland does not influence net export to the mainland. Nor does it influence total mainland net import that supplies the SGE.

Just some thoughts..

Overview Shanghai Gold Exchange data 2014 week 11

- 34 metric tonnes withdrawn in week 9 (10-03-2014/14-03-2014)

- w/w – 6.5 %

- 488 metric tonnes withdrawn year to date

My research indicates that SGE withdrawals equals Chinese wholesale gold demand. For more information read this, this, this and this.

This is a screen shot from the weekly Chinese SGE trade report; the second number from the left (blue – 本周交割量) is weekly gold withdrawn from the vaults in Kg, the second number from the right (green – 累计交割量) is the total YTD.

This chart shows SGE gold premiums based on data from the SGE weekly reports (it’s the difference between the SGE gold price in yuan and the international gold price in yuan).

Below is a screen shot of the premium section of the SGE weekly report; the first column is the date, the third is the international gold price in yuan, the fourth is the SGE price in yuan, and the last is the difference.

A source in the mainland explained me the negative premiums like this:

the SGE is a very illiquid market if you look at the daily volumes. Several slightly larger orders can push the market prices up or down and often traders have to wait tens of minutes to get their orders fulfilled. The price doesn’t track the London spot well. Sometimes the London spot has moved several dollars but the prices on the SGE didn’t budge at all…

The low liquidity on the SGE is mainly because of the much higher commission compared to the SHFE and a much poorer information system. Without the PBoC protection, the SGE should have closed down years ago!

In my humble opinion, the weekly withdrawals and the daily deferred payment direction are more important than the premiums.

The screen shot below is the how the trading on the SGE looks like.

This is AU9999. Look at the upper left corner, you can see the bid and offer prices. Here is how to read it:

卖价5 266.46 100

卖价5= Offer No. 5

266.46 is the Offer price but not the lowest offer. The lowest is 266.20.

100 is the size. The minimum size for Au9999 is 10g. So 100 lots are 1kg.

买价= bid

成交= The price for the last transaction

均价= The weighted average price

涨幅= Movement in percentage

今开= Today’s opening

涨跌= Movement in CNY

最高= Day high

总量= Total volume

最低= Day low

The rest is not very relevant so doesn’t need translation.

You can see how illiquid this market is. The spread between the best bid 266.01 and best offer 266.20 was 0.19CNY.

And for the whole night 21:00-2:30 Beijing Time (The SGE has a night session 21:00-2:30 GMT+8), only 2678 lots were traded. Remember every lot is only 10g.

And you may notice that the Au9999 crashed to 167.50 some time last year. Yes, you read that right. That happened on Dec 27 2013.